Simple and Compound Interest

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What is Simple Interest?

Back

Simple Interest is the interest calculated only on the principal amount, or the original amount of money borrowed or invested.

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What is the formula for calculating Simple Interest?

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The formula for Simple Interest is: SI = P * r * t, where SI is Simple Interest, P is the principal amount, r is the rate of interest per year, and t is the time in years.

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What is Compound Interest?

Back

Compound Interest is the interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods.

Front

What is the formula for calculating Compound Interest?

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The formula for Compound Interest is: A = P (1 + r/n)^(nt), where A is the amount of money accumulated after n years, including interest, P is the principal amount, r is the annual interest rate, n is the number of times that interest is compounded per year, and t is the number of years.

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How does Compound Interest differ from Simple Interest?

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Compound Interest is calculated on the total amount (principal + accumulated interest), while Simple Interest is calculated only on the principal.

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What is the principal amount in interest calculations?

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The principal amount is the initial sum of money that is either invested or borrowed, before any interest is added.

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What does 'rate of interest' mean?

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The rate of interest is the percentage at which interest is calculated on the principal amount, usually expressed on an annual basis.

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What is the time period in interest calculations?

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The time period is the duration for which the money is borrowed or invested, typically measured in years.

Front

If you invest $1000 at a simple interest rate of 5% for 3 years, how much interest will you earn?

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Using the formula SI = P * r * t: SI = 1000 * 0.05 * 3 = $150.

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If you invest $1000 at a compound interest rate of 5% compounded annually for 3 years, what will be the total amount?

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Using the formula A = P (1 + r/n)^(nt): A = 1000 (1 + 0.05/1)^(1*3) = $1157.63.